AEP: World coal giant Peabody faces bankruptcy as industry implodes

The world’s largest private coal company is on the verge of bankruptcy as the commodity crash claims its biggest victim, crippled by fierce competition from cheap gas and a radical policy shift by China.

The US-based group Peabody Energy missed interest payments on two sets of bonds worth $1.6bn, stunning markets with a warning that it may be forced to invoke Chapter 11 protection under US insolvency law.

“There exists substantial doubt whether we will be able to continue as a going concern,” it said in a filing to the US Securities and Exchange Commission.

“There can be no assurance that we will be able to obtain additional financing on commercially reasonable terms or at all,” it said. The company’s share price crashed 45pc in early trading in New York.

The Peabody group dates back 133 years and generated a tenth of America’s electric power as recently as five years ago. It is the first household name to succumb to the deepening coal crisis, which has already forced Arch Coal and Alpha Natural Resources into bankruptcy and wiped out the stock market capitalisation of the industry.

Foresight Energy defaulted this week and Cloud Peak Energy is hanging on by its fingertips. The price of thermal coal has dropped to $43 a tonne from $140 at the peak of the commodity boom in 2008.

Thermal coal prices have crashed

America’s coal companies have been hit from all sides at once, facing an assault from cheap shale gas and the prospect of crippling regulatory costs from the Obama Administration’s Clean Power Plan – deemed a “death sentence” of the US coal industry.

The US Supreme Court has issued a temporary stay on the plan but the Environmental Protection Agency insists that this will not make any difference in the long term.

The greatest threat to the coal industry may prove to be the COP21 deal on climate change agreed in Paris before Christmas. It commits the world to a new energy order of far lower carbon emissions than previously assumed, and implies a move to carbon pricing over time that will hit coal hardest. Gas produces roughly half as much the CO2 in power plants.

The UK plans to phase out all its coal plants within the next 10 years, and similar moves are underway in parts of the US. Duke Energy in North Carolina is to close most of its coal plants gradually and switch to gas. “We are trying to stay ahead of the curve,” it said.

The big surprise is how quickly China has cut coal dependence in a bid to clean up its polluted cities and avert a middle class revolt.

Peabody's share has collapsed, an emblem of the coal industry

The International Energy Agency said the country had slashed coal use for power generation from 80pc to 70pc over the last four years, with hydro and wind power making up most of the difference.

China’s coal consumption fell 2.9pc in 2014 and a further 3.7pc in 2015 as the country ditches heavy industry and moves up the technology ladder to a mature growth model. It suggests that the once unthinkable moment of ‘peak coal’ may have arrived a decade early.

"The golden age of coal seems to be over, and the main reason is China,” said the IEA in December. “Given the dramatic fall in the cost of solar and wind generation and the stronger climate policies that are anticipated, the question is whether coal prices will ever recover. ”

The sudden turn of events in China has caught the coal industry badly off guard. The country's coal demand has tripled since 2000 to 3.920 tonnes - half of global consumption - and the big mining companies almost all assumed that it would continue. The market is now massively over-supplied.

China dominates global coal demand

The Communist Party plans to shut down 4,300 coal mines and cut annual output by 700m tonnes over the next three years. These cuts may at least help to stabilise global coal prices in the medium term.

Some hedge funds and private equity groups are already snapping up distressed assets, betting on a rebound as the commodity cycle bottoms out.

Peabody may yet recover under creditor protection. There is still huge demand for coal in South East Asia and other parts of the emerging world. But the prospect of Chapter 11 is a dramatic fall for a company worth almost $30bn in the pre-Lehman glory days, with operations across the US and Australia.

Consultants IHS say it may require a blitz of investment on carbon capture and storage (CCS) – and a leap forward in technology – to restore the fortunes of coal in the new energy landscape following the climate deal.

The coal industry missed its chance to guarantee its own future by investing in CCS when it was flush with cash. It may now have to do so in much tougher circumstances.